In 1983, Medicare introduced a fixed payment model for hospitals known as the inpatient prospective payment system (IPPS). That change marked a turning point as it shifted reimbursement from cost-based to diagnosis-based payments. Over the decades, that same concept has been extended into the post-acute and community setting: skilled nursing facilities (SNFs) in 1998, home health agencies (HHAs) around 2000, inpatient rehabilitation facilities and psychiatric facilities in the 2000s, and additional outpatient and hospice programs thereafter.
Today, prospective payment systems (PPS) are the backbone of virtually every major Medicare reimbursement pathway, and the 2025 updates from Centers for Medicare & Medicaid Services (CMS) reflect continuing efforts to align payments with patient complexity, regional cost variation, and quality outcomes. For smaller healthcare providers, meaning those operating in home health, SNF, hospice, or outpatient therapy settings, understanding the PPS structure is important as it is key to financial planning, compliance, and sustainability.
Prospective Payment Systems (PPS): A Refresher for Providers
A prospective payment system means this: Medicare pays a predetermined amount for a defined set of services, based on classification systems such as case mix or service period; it is not simply a bill for each service rendered. So, what this means is that providers must deliver care within that payment framework.
For providers, PPS models will govern how you are paid when serving patients in the Medicare system. Key settings include SNFs (via SNF PPS), home health (via Home Health PPS or HH PPS), and hospice and outpatient therapy (which follow related fixed-payment models). Using PPS, CMS aims to incentivize efficient, high-quality care rather than simply “more” care. These same principles also influence Medicaid and some commercial payers, meaning changes to PPS can also ripple beyond Medicare.
Skilled Nursing Facilities (SNFs): What the 2025 Update Means
Under SNF PPS, payment is driven by the Patient-Driven Payment Model (PDPM), which classifies patients based on clinical categories such as nursing needs, therapy, and comorbidities rather than simply volume of therapy minutes. For SNF operators or units within larger facilities with SNF-type business, understanding PDPM categories, documentation, and case mix is important.
2025 and Beyond: Key Data
The FY 2025 SNF PPS final rule increased payment rates by 4.2 percent (approximately $1.4 billion in aggregate) beginning October 1, 2024. For FY 2026 (effective October 1, 2025), CMS finalized a payment increase of 3.2 percent (about $1.16 billion) for SNF PPS.
What This Means for Providers
For skilled nursing facilities, the 2025 rate increase offers some welcome breathing room, but it’s hardly a windfall. Rising labor costs, supply shortages, and utility expenses continue to outpace reimbursement, so managing margins remains a challenge. The Patient-Driven Payment Model adds another layer of complexity: because payments hinge on accurate documentation of clinical category, comorbidities, and therapy needs, even small coding inconsistencies can be impactful. Facilities have to make sure that their assessments and documentation are precise and that their internal workflows support the classifications Medicare uses to determine payment.
Unlike large healthcare systems with full financial and compliance departments, many smaller providers such as SNFs must make do with lean back-office operations. That makes it even more important to regularly review cost per patient day, track shifts in case mix, and use whatever data analytics tools are available to spot trends early. Programs such as the SNF Value-Based Purchasing initiative and ongoing wage index or geographic adjustments also directly affect reimbursement. We recommend staying current with CMS guidance and understanding how each policy change plays out locally.
Home Health Agencies (HHAs): Navigating the 2025 Rule
Home health agencies are reimbursed under a 30-day payment model via the HH PPS. Key drivers include case mix, the Patient-Driven Groupings Model (PDGM), outlier adjustments, and geographic wage factors. For agencies, visit scheduling, accurate OASIS (Outcome & Assessment Information Set) documentation, and cost tracking are all indispensable components.
2025 Update Highlights
For calendar year (CY) 2025, CMS finalized a payment update for HHAs with a 0.5 percent aggregate increase (about $85 million) compared to CY 2024. The payment update stemmed from a market basket increase of 3.2 percent, offset by productivity and other adjustments.
A modest payment increase means room for margin remains tight, especially if labor and home-care supply inflation continue. HHAs should emphasize efficiency: accurate grouping under PDGM, careful management of outlier thresholds, and optimized visit frequency. With CMS signaling potential cuts in future years (such as a proposed net reduction in CY 2026 of 6.4 percent for HH PPS) understanding trajectory today is necessary for long-term planning. Documentation quality and compliance with reporting requirements also influence whether agencies will receive the full update or lose ground.
Hospice and Outpatient Therapy Providers: The Broader PPS Landscape
While outpatient therapy and hospice services are not always reimbursed via a classic PPS like inpatient hospitals or SNFs, the implications of PPS models still matter.
Hospice reimbursement is typically through a per-day payment for routine home care, with higher rates for continuous home care, general inpatient care, and respite care. Wage-index updates and labor cost adjustments continue to affect rates. It’s important for hospice providers to understand how cost per day, staffing mix, and utilization patterns map to reimbursement.
Outpatient therapy providers, meanwhile, operate under payment models influenced by Medicare’s PPS framework. Documentation accuracy, compliance with therapy thresholds, and coding precision are all important. Even if these practices don’t operate under a “true” PPS, they face the same pressures toward cost control, compliance, and demonstration of value.
Add-On Payments and Incentives: Opportunities for Smaller Entities
While large hospitals often focus on new technology add-ons, smaller providers can still benefit from targeted payment enhancements and incentives. Rural and low-volume adjustments in home health, hospice, and SNF settings can provide differential reimbursement. Quality-based incentive programs such as the SNF Value-Based Purchasing Program and the Home Health Value-Based Purchasing Model can reward high-performing organizations with additional payments.
Telehealth and remote monitoring are also expanding under CMS’s evolving rules. For instance, home infusion and IVIG services are receiving updated payment structures, and home-based telemonitoring is being integrated into broader PPS frameworks. Providers that smartly adopt technology can often capture incremental reimbursement or cost savings.
Also, evaluating whether specific services or populations qualify for additional payments is increasingly important. Working with advisors who track CMS updates, wage-index changes, and new incentive programs can help organizations avoid missing valuable opportunities.
Why PPS Knowledge Matters
It’s easy to assume that Medicare’s prospective payment systems are a concern mainly for large hospitals, but they shape every corner of healthcare. For smaller and mid-sized providers, the implications are both practical and strategic. Understanding how reimbursement is calculated gives owners and administrators the ability to forecast revenue more accurately, manage staffing, and anticipate the effect of regulatory updates.
Because PPS models reward efficiency and case-mix accuracy, providers with limited scale must be especially disciplined about aligning operations to these frameworks. Efficient scheduling, thoughtful patient intake, and close monitoring of staff productivity can all influence margins under fixed payment models. Compliance and audit readiness are equally critical. Proper documentation and coding are foundational for reimbursement and can defend against costly recoupments or payment denials.
There is also a strategic dimension. By understanding where CMS is heading – toward greater value-based accountability, expanding telehealth coverage, and increased emphasis on home- and community-based care – providers can make better decisions about where to invest time and resources. Even for those who rely more on commercial or Medicaid payers, Medicare’s PPS models set the tone for much of the industry. Tracking these trends can give providers an advantage.
Ultimately, with inflation and workforce shortages still pressuring operating costs, modest PPS rate increases (like the 0.5 percent adjustment for home health agencies) underscore how little margin there is for inefficiency.
Final Thoughts
The evolution of Medicare’s prospective payment systems from the 1983 hospital IPPS launch through SNFs, home health agencies, hospice, and outpatient settings reflects a fundamental shift in how care is financed and delivered. Each extension into post-acute and home-based care carries the same core logic: pay for expected resource use, promote efficiency, and align reimbursement with patient complexity.
While the 2025 updates offer modest increases in many settings, they also signal that cost pressures, quality expectations, and documentation requirements are intensifying. At Walters Accounting, we believe your financial performance is inseparable from your reimbursement strategy. Our team helps healthcare practices interpret PPS updates, model revenue under different case-mix scenarios, and align operations with CMS expectations. By deeply understanding how to meet Medicare PPS compliance, we healthcare organizations build a foundation for long-term financial stability and growth.
